Tuesday, 13 May 2014

The inflation-mongers are still stalking us

People of a certain age still remember an age in which the word “inflation” has got nothing to do with money.

But inflation, which we’d never heard about before, was all of a sudden all around us. A friend recounts the story of returning to Te Kuiti after a year away doing his OE, including a visit to the 1976 Montreal Olympics, to discover prices at the Te Kuiti pie cart had rocketed in his absence. Prices that had never changed in years. He and his friends were mystified when they were told this was “inflation.”

Inflation had come to New Zealand, and has been hitting us hard ever since.

Ever wondered who is the most responsible for that hard-hitting mechanism of economic destruction? The man most responsible, says former Reagan Administration Budget Director David Stockman, was “one of the most arrogant, wrong-headed Keynesians of modern times—–Dr. James Tobin. It was Tobin’s neo-Keynesian theories and activist role in the Kennedy-Johnson White House which gave rise to the Great Inflation and its destructive aftermath.”

Dr Tobin’s inflation was exported around the world, all the way to the Te Kuiti pie cart, by virtue of the US dollar being the world’s reserve currency, as it still is.

The America of the early 1960s—an economy that Eisenhower had left in fine, growing, non-inflationary fettle—was suffering from too much “slack” [they said].This included unnecessarily high levels of unemployment (@ 5.5% in 1962!) and a general failure to utilize capital and labour resources at their full-employment level and thereby achieve “potential GDP”. The latter was held to be mathematically calculable and was reckoned by the JFK’s Keynesian doctors to be tens of billions greater than reported GDP. Accordingly, until the nation’s economic bathtub was filled full-up to the brim there was an urgent need for more fiscal and monetary stimulus. When conservatives protested that deficits should be reserved for national emergencies and were potentially inflationary, Tobin and his acolytes impatiently huffed that traditionalists didn’t understand economic “slack” and its policy cures. As they had it, “slack” was an economic free lunch that could be harvested by means of “accommodative” policy until the last steelworker was called back to work and every auto plant mustered a third shift. Soon the experiment was off to the races…

… and we’ve been suffering from it ever since.

And the reason the story, and Tobin’s role in it, is still important today?

[Because] one of Tobin’s first students to be conferred a PhD after he repaired from his Washington follies to Yale was Janet Yellen. [Yes, that Janet Yellen, the new head of the world’s largest central bank.] That was 1971. If Keynesian economics in a national bathtub that was not at all a closed system was nonsense even then, it surely is nothing less than a laughingstock in the blooming, buzzing, churning global economy of today—-a place where the source of the marginal supply of labour and capital cannot even be pronounced in Washington, let alone be measured, calibrated and factored into a policy equation. Yet here is Janet Yellen at a Congressional hearing yesterday faithfully lip-synching professor Tobin. She has not even learned any new jargon in 43 years!

“In light of the considerable degree of slack that remains in labour markets and the continuation of inflation below the (Fed’s) 2 percent objective, a high degree of monetary accommodation remains warranted,” Ms. Yellen said.

This was all by way of justifying the lunatic proposition on which the Fed is now operating: Namely, that for the 68th consecutive month it kept the money market rate at zero—a condition that has never previously occurred in all of human history.

As George Santayana might say at this point, “Those who cannot remember the past, are condemned to repeat it.”

And as David Stockman might bewail, “And those who can remember the past are condemned to watch helplessly as others repeat it.”

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